For many younger families, this is the time in our lives when we begin to intentionally plan for the future. As our earning power grows, we begin to invest our money, buy property, and generally acquire more assets. However, one thing we often fail to reflect upon is what will happen to everything should we meet an untimely death.
Establishing a trust is a way you can have greater input into how your assets are used and distributed even after death. A trust allows you to ensure that any resources you leave behind can be used to take care of your family, that it will be managed wisely, and that it will go to who or where you want it to. Having worked hard for everything you have, a trust can make sure it is not squandered needlessly or that it goes to the wrong people.
- 1 What is a Trust?
- 2 Why Does a Family Need a Trust?
- 3 What is the Process?
- 4 Conclusion: 5 Things to Consider When Deciding on a Trust
What is a Trust?
A trust is a way you can give someone else your property or assets, but still maintain some control over it.
It usually emerges when a person transfers their property or assets to someone (known as the trustee) to manage them for the benefit of another person or persons (known as the beneficiaries). Though any assets or properties are in the name of the trustee, they are intended to benefit the beneficiaries.
There are generally two main types of trusts: (1) those that come into effect while the property/asset owner is alive, and (2) those that come into effect once he or she dies. For most families, the more commonly used one is the latter, and the one that will be discussed below.
Why Does a Family Need a Trust?
While a family can have various reasons for setting up a trust, there are usually two reasons they are established.
- The first reason is that a person who owns the property or assets wants to keep the beneficiary from exercising total control after their death.
An example of this scenario might be if your beneficiary is a minor (under 18), mentally disabled, or perhaps is just bad with money. In these situations, giving him or her all your property or finances all at once (for a minor, once that person turns 18) will likely lead to poor financial decisions being made and the money disappearing quickly. Establishing a trust is beneficial here as a trustee would be in charge of the money and would be able to give it to the beneficiary in more controllable and sensible amounts.
- The second reason is that the person who owns the property or assets want one beneficiary to enjoy the property or assets in the short term, but ultimately wants someone else (another beneficiary) to become the permanent owner.
An example of this is if a person passes away and leaves a surviving spouse and children. A trust can be established where the trustee will use the finances to take care of the spouse during his or her lifetime, but will ultimately transfer everything to the children after the spouse’s death. This is beneficial as many people worry what their spouse will do for a living should they pass away. In this case, the trust is used to make sure the surviving spouse is taken care of before fully transferring all assets to the children, who can then use them as they see fit.
What is the Process?
For most families, the directions and guidelines for establishing a trust can simply be incorporated into a will (see the article Why Do I Need A Will? for more information). While it is also possible to establish a trust through a separate trust agreement, it is more simply established within a will.
a. Choosing a trustee
A trustee has very important tasks associated with their role. As a part of managing your property and/or assets, he or she must:
- Manage your property and assets, which may include buying, selling, and making investment decisions
- Pay any specified amounts to your beneficiaries, or transfer property or assets as indicated
- Providing accounting of any trust finances when requested by the beneficiaries
- File income tax returns on behalf of the trust
Given these important duties, the most important part of the process of creating a trust is choosing the proper trustee. You will want someone trustworthy and capable, whom you know will properly manage your assets and follow your instructions. Alongside this, in Wills & Estate Planning for Canadians,1 it is also noted that a good trustee:
- Is honest
- Has the skill and knowledge to handle the trust investments
- Has trustworthy judgment if you are allowing him or her greater discretion in managing the trust
- Has the time necessary to manage the trust
- Is willing to take on the role
As you reflect upon who you would want to be your trustee, it is beneficial to think of an alternate person as well. In the event that your primary trustee is unable or unwilling to take on or continue the role, you will have a back-up already in place and ready to go.
For those who cannot find a proper trustee to appoint, an option to use a trust company (a professional trustee) is available. However, unless there are significant assets or properties to manage, it is generally more worthwhile and cost-effective to appoint a trustee from friends or family.
b. Naming your beneficiaries
Trusts can be set up in many different ways and you can name one or more beneficiaries. You can also set up different timelines for when a person can benefit from the trust. With no strict guidelines on who you can name, you have the liberty to designate and distribute your assets in ways that you think will be most beneficial.
Some examples of beneficiaries and trust that can be established are:
- A spousal trust – to provide for a spouse until his or her death
- A trust for a minor – to provide for a beneficiary under the age of 18
- A spendthrift trust – to provide for a beneficiary who has trouble handling money responsibly
- A special needs trust – to provide a beneficiary who is physically or mentally unable to look after his or her own financial affairs
- A trust for a charity – to provide for a family member until his or her death, and then to give the property to a charity
Conclusion: 5 Things to Consider When Deciding on a Trust
A trust is a useful tool in managing your assets and ensuring your loved ones will be properly cared for in the event of untimely death. However, in determining whether one is right for you, consideration should be given to the following questions:
a. Who will currently get all my assets if I pass away?
Many people are not entirely sure what happens to all their assets if they pass away or die unexpectedly. This is a good question to ask in planning for the future. If you are unsure of the answer, and whether you have a lot of a little, planning a will (see the article Why Do I Need A Will? for more information) or establishing a trust is a way to have greater input into where it goes should the unfortunate occur.
b. Do I have a need for a trust?
If you are worried about how loved ones may support yourself or make ends meet in your absence, a trust can help ensure that whatever you leave behind can help them. This is especially relevant if your spouse does not work or if you have minor or disabled children. Rather than giving them everything at once as a will might, a trust will allow you to give them support at regular intervals.
c. Can I think of someone capable of acting as my trustee?
A trustee will be responsible for managing everything you leave behind. Appointing someone that you not only trust, but that you also know will be capable is key. In the event that there is no one suitable, you can also consider employing a trust company to handle everything.
d. Have I thought about who to name as beneficiaries?
When we think of beneficiaries, our immediate loved ones will be the first to come to mind. It is also constructive to reflect upon any friends or charities you might wish to give to, making sure you are not missing anyone. Since you can also determine when a person should receive anything you leave, it is also beneficial to think about any timelines you want for having your assets transferred to others.
e. Have I prepared a will?
Though a will is a useful tool by itself in planning for the future, trusts are commonly written as part of a will. If you do not have a will prepared yet, this is something you should give serious consideration to as part of your overall life and financial planning.
Margaret Kerr and JoAnn Kurtz, Wills and Estate Planning for Canadians (Mississauga: John Wiley & Sons Canada, 2010), p. 105 ↩